Empirical Analysis of the Dutch Disease Effect in Nigeria’s Non-Oil Manufacturing Sector

The Dutch Disease theory predicts that oil revenue booms cause real exchange rate appreciation that harms non-oil tradeable sectors, and empirically testing this hypothesis for Nigeria's manufacturing sector provides evidence for understanding the structural consequences of oil dependence. This study empirically examined the Dutch Disease effect in Nigeria's non-oil manufacturing sector using quarterly data from 1999 to 2022. The Dutch Disease mechanism was operationalised through the real effective exchange rate, manufacturing value added as a share of GDP, and oil revenue as the booming sector indicator. A Vector Error Correction Model was applied to examine long-run relationships. Variance decomposition and impulse response functions examined the transmission dynamics. Results confirmed a significant long-run negative relationship between oil revenue booms and manufacturing sector value added (beta = -0.43, p < 0.01). Real exchange rate appreciation mediated 61 percent of the oil-manufacturing relationship. Spending effect analysis confirmed government expenditure expansion during oil booms as a primary appreciation driver. The resource movement effect was less prominent than predicted by the basic Dutch Disease model, reflecting Nigeria's labour market segmentation. Manufacturing sectors most affected were food processing, textiles, and chemicals. The study provides original empirical evidence of Dutch Disease operating in Nigeria and recommends a Sovereign Wealth Fund mechanism to sterilise oil windfall from domestic spending, manufacturing protection through strategic tariffs, and export promotion for non-oil manufactured goods. Keywords: Dutch Disease, manufacturing sector, real exchange rate, oil revenue, Nigeria